Many investment options are available to investors. Investment firms (funds) provide collective investments that pools money from many investors and invest their money in stocks, bonds, dividends, short-term money market instruments, and/or other securities. Investors may purchase assets from the fund via a fee arrangement from a broker-dealer. A broker-dealer is a company that trades in securities for investors as well as for its own account. In the United States, a broker-dealer must be registered with the U.S. Securities and Exchange Commission. When executing trade orders on behalf of an investor, the broker-dealer is said to be acting as a broker. When executing trades for its own account, the broker-dealer is said to be acting as a dealer. Securities bought from one investor or other firms in the capacity of dealer may be sold to other investors or other firms acting in the capacity of dealer, or they may become a part of the broker-dealer's holdings.
Broker-dealers are required to provide some form of brokerage processing system. The brokerage processing system helps the firms open new accounts, monitor and clear trades, create confirmations, process dividends and corporate actions. The system also helps investors manage their brokerage and idle cash positions left over from brokerage transactions. Idle cash position refers to money that is left over from brokerage transactions. Idle cash from brokerage transactions is generally swept into a brokerage cash management account such as a money market brokerage account that is invested in a money market mutual fund.
To assist the investor in managing their brokerage and cash accounts including idle cash positions, broker-dealers often provide banking type products and services to the investor. These banking type products and services include checking accounts and debit cards tied to an investment vehicle for the brokerage and cash accounts. From time to time a broker-dealer may wish to switch to a new investment firm based on changing market conditions, regulatory pressures, or investor preferences. Switching to a new investment firm, however, creates challenges for the broker-dealer with respect to any banking products offered. For example, if the broker-dealer switches to a new investment vehicle provided by a new investment firm (e.g., a new mutual fund company) the broker-dealer must endure the costly and painful process of changing the banking products or services provided to the investor to make the new investment vehicle available to the investor. Changing banking products may include repopulation of the investor's checkbooks and/or issuing new debit cards to the investor. The broker-dealer must repopulate the checkbook every time there is a change in the investment vehicle from a new investment firm provided to investors. Repopulating checkbooks and issuing new debit cards creates a conversion expense for the broker-dealer, leads to client dissatisfaction, and presents unique and difficult challenges for the broker-dealer in terms of offering a mix of banking tools and services with investment vehicles whose performance is tied to market conditions.
Securities processors like, ADP/Broadridge and Thomson's Beta offer multiple funds for Cash Management Accounts (CMA) on their brokerage processing system. These solutions, however, require the cooperation of a bank or other financial institution to provide the banking products and services to their investors. In addition, the brokerage processing solutions are costly, do not provide asset allocation features, and require a significant amount of customization. Customizing a brokerage processing system requires substantial one-time up-front investment costs and ongoing maintenance costs.
FIG. 1 illustrates a conventional system 100 employing integrated banking transaction services 116 (IBTS), which is described in more detail below. A broker-dealer 102 manages investor brokerage cash accounts in-house through a relationship with a banking service provider 110. When an investor (e.g., a client of the broker-dealer 102) opens a brokerage account with the broker-dealer 102, they are given the option of opening an investment account and/or a cash management account.
The broker-dealer 102 generally offers two main cash management account options for the investor. One cash management account option is a money-market mutual fund account provided by an investment firm or fund. Money-market mutual fund accounts levy a management fee, pay an interest rate that mirrors prevailing short-term rates, and are not insured. Another cash management account option is a bank-deposit sweep account. Bank-deposit sweep accounts generally pay less interest than money-market mutual fund accounts and are insured.
The broker-dealer 102 may provide brokerage accounts through an investment firm 106 (e.g., a mutual fund company or “fund”). Idle cash positions are swept 104 into the brokerage account managed by the fund 106. Idle cash positions arise from cash left over from brokerage transactions. For example, buying and/or selling securities may give rise to an idle cash position, which is then swept 104 into the brokerage account. The fund 106 may offer a money market mutual fund (e.g., Fund1) as a brokerage account in which to sweep 104 the idle cash. The investor can access cash held in their brokerage accounts through checkbooks 112 and debit cards 114 (or other banking products or services) issued on behalf of the broker-dealer 102 by a banking service provider 110. Through the checkbooks 112 and debit cards 114 the client can easily access idle cash from liquidated securities from their brokerage account to make purchases. The broker-dealer 102 pays banking service fees 118 to the banking service provider 110 for providing checkbooks 112, debit cards 114, and/or other banking products or services, to the client. The fund 106 pays basis points (bps) fees 108 to the broker-dealer 102.
Through the banking service provider 110, the broker-dealer 102 may provide accounts insured by the Federal Deposit Insurance Corporation (FDIC) to clients. If the broker-dealer 102 changes the brokerage account from one fund 106 to another investment firm or fund 206 (Fundn), the client will be minimally affected because their checkbooks 112 and debit cards 114 are provided by the banking service provider 110 and not by the broker-dealer 102. Accordingly, there is no need for the client to change their checkbooks 112 and debit cards 114 and the broker-dealer 102 can offer more of a turnkey service.
FIG. 2 illustrates a conventional system 200 that does not employ the IBTS 116 services described in the system 100 shown in FIG. 1. With reference to the system 200, the fund 106 offers end-to-end cash management account solutions either in-house or through a relationship with a third-party banking services provider 204. In the system 200, the fund 106 may provide banking services to the client either in-house or through a relationship with a banking services provider 204. This is in contrast to the system 100 illustrated in FIG. 1 where the broker-dealer 102 rather than the fund 106 has a relationship with the third party banking service provider 110. Thus either the fund 106 or the third party banking services provider 204 issues the checkbooks 112 or the debit cards 114 to the client on behalf of the fund 106. Because the system 200 does not employ the IBTS 116 services, the fund 106 manager pays fees 202 in terms of basis points (bps) to the broker-dealer 102. The fees 202 paid to the broker-dealer 102, however, are 12b-1 fees minus any banking service costs incurred by the fund 106 in providing, managing, or paying for issuing the checkbooks 112 and debit cards 114 to the client. The fund 106 manger deducts the banking services costs from 12b-1 paid to the broker-dealer 102 on assets. Such transactions, however, obscure the banking services fees and make it seem as though the banking services are “free”.
In addition, the system 200 illustrated in FIG. 2 makes it difficult for the broker-dealer 102 to offer insured FDIC products to the clients. For example, if the fund 106 does not offer an FDIC product, the broker-dealer 102 must make arrangements with a new fund 206 that offers an FDIC product or potentially lose the client. When the broker-dealer 102 makes arrangements with the new fund 206 to provide an FDIC product, however, the new fund 206 must issue new checkbooks 212 and new debit cards 214 to the client. In the United States, however, such an FDIC arrangement with the new fund 206 may be of interest to federal regulators. This is particularly true in regards to banked-on broker-dealers 102 that offer FDIC products and then maintain those assets on their books (e.g., accounting records, such as ledgers and journals). The federal regulators have an interest in ensuring that there was full disclosure to the client concerning the new fund 206. There must be full disclosure to the client that the product offered is insured by the FDIC and the disclosure must be was made with candor. For example, the client must be informed that the principal is insured in FDIC accounts and is not insured in money-market accounts. The client also must be informed that the performance of a money market fund is tied to the financial markets and is not guaranteed.
In the system 200, full disclosure requirements and payment of 12b-1 fees on assets leave the broker-dealer 102 with limited opportunities. The broker-dealer 102 can either address the regulatory issues and accept potential client fallout, or switch to the new fund 206. As discussed above, if the broker-dealer 102 switches to the new fund 206, however, the broker-dealer 102 incurs conversion costs associated with repopulating checkbooks 212 and debit cards 214, which may cost approximately $7 per shareholder account. The broker-dealer 102 also may be bound to investment vehicles arranged through or provided by the fund 106 and may switch only upon payment of conversion costs. The broker-dealer 102 will incur significant costs if it swaps mutual fund investment vehicles in a cash management account without re-issuing checkbooks and debit cards to each and every client (e.g., shareholder) at significant cost. Furthermore, the broker-dealer 102 is unable to easily offer multiple fund options for cash management accounts.
Accordingly, there is a need for a brokerage system to provide cash sweep account products and services to manage brokerage cash sweep accounts and provide multiple fund options (e.g., mutual fund supermarket), asset allocation, and full integration within a single platform to the client. There is a need for a brokerage system that enables multiple money market accounts to act as investment vehicles for cash sweep accounts, to accommodate multiple investment funds (e.g., money market funds, FDIC accounts), and enables swapping investment vehicles without incurring conversion expenses or impacting the client by necessitating the reissue of checkbooks and debit cards to each and every shareholder at a significant cost per account.